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Reforms essential to make Ireland’s pension system fairer

22/04/2013 - Ireland should make its pension system simpler and fairer so that everyone gets sufficient income for a decent standard of living in retirement, according to a new OECD report.

The OECD Review of the Irish Pension System recommends that the Government put in place either a universal basic pension scheme or a single means-tested pension, both topped up with a compulsory private pension.

The review, commissioned by Irish Minister for Social Protection Joan Burton, says that today Ireland spends much less than most European countries on public pensions, at 7.5% of GDP compared with an EU27 average of 11.3%. But despite a higher effective retirement age, an ageing population will push up spending to 11.7% by 2060, closer to the EU average of 12.9%.

The basic State pension is relatively generous compared with other OECD countries, at around 35% of average wages, and second only to New Zealand. This partly explains Ireland’s low pensioner poverty rate of 10%, the same as in Sweden, and well below the OECD average of 15%.

But retirees in other countries receive bigger pensions overall because they pay into private and public schemes during their working lives. Ireland and New Zealand are the only two countries with no additional mandatory earnings-related pillar.

Launching the report in Dublin, John Martin, OECD Director of Employment, Labour and Social Affairs, said: “Ireland needs to make its pension system more affordable in the long-term. With public finances under pressure and to avoid a rise in pensioner poverty, private pension coverage needs to be increased urgently.”

The simplest, least costly and most efficient way of reaching high and even coverage rates across all income groups is compulsion, says the OECD. Auto-enrolment, whereby workers are enrolled automatically by their employer in a private pension scheme unless they explicitly decide to opt out, would be a second-best option that requires careful design and may be costly.

Payments into private schemes could be targeted at workers above a certain income level. The household benefits package and free travel could be transformed into a cash supplement, available to all or means-tested.

Linking benefits to contributions more transparently and fairly is essential, says the OECD. Under the current scheme, some pensioners who started working early but had gaps in contributions during their career can find themselves receiving less than others who started working late but paid in continuously during the last ten years of their career.

Among the other OECD recommendations are that Ireland could:

Link the retirement age to life expectancy after 2028 when it is scheduled to rise to 68.

Allow retirees to combine work and pension income.

Payments to Defined-Contribution plans should be determined by how much income people receive from the State pension

Phase in more quickly the new rules of the occupational scheme for public workers.

Alter the tax deferral scheme for private pensions to make them more attractive to low and middle earners. This should be via flat subsidies and matched contributions.

Make defined-benefit plans more secure by strengthening legislation to protect members if plans wind up and reform laws to make them more flexible.

Take into account the payout and accumulation phases when designing the Defined-Contribution scheme, and keep costs and fees as low as possible.

For further information, journalists should contact Spencer Wilson of the OECD Media division, spencer.wilson@oecd.org.